A new law passed by Congress and signed by President Obama this year allows people with disabilities who became disabled before they turned 26, or their caretakers, to set aside money in tax-free savings accounts without affecting their eligibility for government benefits.
Built on the foundation of the current 529 education savings plans that help families save for college, the Achieving a Better Life Experience (ABLE) Act allows families to have a tax‐deferred savings vehicle to save for the care of people with disabilities. The National Disability Institute estimates there are 58 million individuals with disabilities in the United States. Many of these individuals will qualify for ABLE accounts.
Under the ABLE Act, a taxpayer can contribute up to $14,000 annually to an account, invest the money in a way he/she chooses, and take tax-free distributions from the account to use toward qualified disability expenses. Such expenses include costs for health care, education expenses, housing, transportation, employment training and support, assistive technology and personal support services, prevention and wellness, financial management and administration services, legal fees, expenses for oversight and monitoring, funeral and burial costs, and other expenses the IRS approves. Almost any expense related to the disability, and related to managing the account as well as the investments, is a qualified disability expense.
To be eligible for an ABLE account, a qualified individual must be deemed disabled before the age of 26. There are two ways to satisfy the disability requirement (you must satisfy only one):
- The individual is entitled to benefits based on blindness or disability under Title II or XVI of the Social Security Act.
- The individual files a disability certification with the IRS for the tax year. The disability certification must state the individual has a medically determinable physical or mental impairment that results in marked and severe functional limitations and that can be expected to result in death or have lasted for a continuous period of not less than 12 months, or is blind, determined before the age of 26.
Eligible individuals can have only one ABLE account at any time, and must reside the state in which the account is maintained (or of a state contracting with that state). Eligibility needs will be redetermined annually. The rules do allow a person with a power of attorney or the individual's parent or guardian to set up the account.
While other regulations do exist, the only significant limitation for investments is the number of times per year the beneficiary can direct the investments. This makes ABLE programs a great new tool from the IRS and state taxing authorities to level the playing field for individuals with disabilities. However, ABLE accounts can hold only up to $100,000 without negative repercussions. Because of this, and especially since they apply only to people who became disabled when they were young, most, if not all, families of disabled individuals should still consider setting up traditional special needs trusts if they want to properly care for their relatives with special needs. Many of these trusts can also be drafted to protect the trust assets from Medicaid estate recovery if they are funded with money from family members and not the trust beneficiaries.
ABLE accounts are powerful, much-needed tools for families of individuals with special needs, but they should not be the only approach when considering long-term care. A more comprehensive strategy needs to be in place in order to protect disabled loved ones' valuable benefits while enhancing their quality of life.
